MauledAgain

This past Sunday, the Philadelphia Inquirer published an interesting front-page article, No Telling What’s Taxable (and What’s Not) in Pa., that directed readers’ attention to a sales tax phenomenon with which tax practitioners have long been familiar. Any tax practitioner, or any other person for that matter, who looks closely at a particular state’s list of what is and is not subject to the sales tax comes away bewildered, frustrated, and annoyed with the absurdity of the distinctions one finds between the items in the taxable and non-taxable categories. It makes no sense.

This problem with the sales tax has long interested me, and has been the subject of more than a few MauledAgain posts. For example, in Halloween and Tax: Scared Yet?, I mentioned the change in New Jersey that removed candy bars made with flour, and store-bought Halloween costumes, from the reach of its sales tax. In Halloween Brings Out the Lunacy, I commented on the decision by Iowa revenue officials to classify pumpkins as “not food” and thus subject to the state’s sales tax. In Don’t Tax My Chocolate!!!, I shared some sales tax tidbits from Prof. Beau Baez, including his explanation of how New York, after years of distinguishing little marshmallows from big marshmallows for sales tax purposes, treating the former as tax-exempt food and the latter as taxable candy, finally decided to exempt all marshmallows from the sales tax (a decision noted in No Telling What’s Taxable (and What’s Not) in Pa.), and also decided that the regular Oreo cookie is tax-exempt food but the double-stuff Oreo cookie is candy. In Why Tax Practitioners Must Be Good With Words, Not Just Numbers, I described how the Texas Court of Appeals, as part of its analysis in resolving a property tax issue, noted the separate exemptions in the Texas sales tax law for aircraft and for aircraft equipment. In "Taxing Lawyers" Taxes This Tax Lawyer’s Brain, I shared my thoughts on a proposal in California to expand the sales tax so that it would reach the delivery of professional services.

In Pennsylvania, this question of how universally a sales tax should apply is getting attention because of the proposal to expand the state sales tax to include tickets to theater, dance, music, and performing arts events, as I previously discussed in Taxes, Tobacco, and Tickets: Punching Through the Smoky Haze. The state needs to balance its budget, so the governor and a majority of legislators have decided to expand the reach of the sales tax to certain tickets but not, for example, tickets to sporting events. They have proposed to include cigarillos, but not cigars, in the list of tobacco products subject to sales tax. They would leave smokeless tobacco items in the exempted list.

As a teacher, I find it rewarding to observe someone discovering for themselves what I’ve already figured out, and that’s one reason I was impressed by the No Telling What’s Taxable (and What’s Not) in Pa. article. Like students, the authors bring, or at least share, a sort of innocent perspective on a grubby subject. Those unfamiliar with how tax legislation is manufactured would expect something more logical than what exists in Pennsylvania, or, for that matter, any other state with a sales tax. Consider the examples presented by the article. In Pennsylvania the sales tax applies to popcorn and soda purchased at a movie theater, corporate jets, and Bibles. And does not apply to food, clothing, diapers, caskets, burial vaults, gold bullion, dry cleaning, basic cable services, toothbrushes, trout, horses destined for out-of-state use, films purchased by theaters, Dots and Dentine purchased at a movie theater, corporate stock, newspapers, magazines, candy, gum, wood pellets used for fuel, midair meals, and computer services. For a full list, which entails hundreds of items, see Rev-717AS+, the Retailers’ Information Guide published by the Pennsylvania Department of Revenue.

The stated justification for the difference is that basic needs are exempt and other items are not. But is a top-of-the-line casket a "basic" need? And how does the "basic needs" justification cause contact lenses to be exempt, contact lens wetting solutions to be exempt, but contact lens cleaning solutions to be taxable. It’s not a “basic need” to clean contact lenses?

Even the governor, complicit in the plan to enact an indefensible distinction between cigars and cigarillos, claims to be puzzled by the inconsistency in the classifications. He has offered to "take to a Phillies World Series game anyone who could 'give me one plausible reason why we would exempt bullion, gold bullion.'" The authors of the article then share the news that "he should know." Why? "He signed the bullion exemption into law on July 6, 2006, as a small part of a much broader bill." More proof yet, I suppose, that legislators, governors, and Presidents don’t know the half of what’s in the legislation for which they vote or that they sign. Scary, isn’t it?

The governor then answered his own question, as well as the question racing through the minds of all those who consider the issue. Many of the exceptions "are solely the product of effective lobbying by special interests."

The flap over the distinction between tickets to cultural events and tickets to sporting events has brought out all sorts of opinions and commentary. That’s not surprising, and it’s a healthy development. Citizens need to learn about, and discuss, the operation of government. Similarly, one can ask, and many have asked, why the exemptions for candy, gum, magazines, and newspapers is untouched by the budget plan while tickets to cultural events would be taxed. The Senate Majority Leader explains that these tickets "are certainly not a necessity." No kidding. But neither are tickets to sporting events, neither are cigars, and neither are magazines. He also defends the distinction between cultural events tickets and sporting goods tickets by claiming that the proposed sales tax extension would hit "large-venue concerts" more than other events. Hello? How is that any comfort or relief to the many small, getting-by-on-a-string-and-a-prayer community theaters and other "small venue" operations that are at risk of going out of operation?

It comes down to one very logical explanation for the illogical sales tax law. Money talks. Industries with the money to pay lobbyists, to contribute to political campaigns, to influence citizens with expensive advertising and other media exposure get the better end of the deal. Industries without that monetary power get the short end of the stick. One of the reasons a democracy does not function well if there is a huge gap between the haves and have-nots, as the last decade has demonstrated, and one of the reasons that taxation needs to be implemented in a manner that prevents the widening of that gap, is that the haves end up controlling the nation while the have-nots are relegated to serf status. Oh, campaign contributions are not subject to the sales tax because they are not viewed as purchases, even though everyone knows that campaign contributions are intended by the transferor as a means to acquisition of power.

About two weeks ago, the American Institute of Certified Public Accountants (AICPA) sent me a press release in which it shared a letter it had sent to Michael Mundaca, Acting Assistant Secretary of the Treasury for Tax Policy. The letter transmitted the AICPA’s comments on tax compliance revenue proposals in the Administration’s 2010 budget. Unfortunately, there were no links in the press release to an online version of the press release, the letter, or the comments, and after hunting around the AICPA web site, I concluded either that these documents aren’t online, they’re hidden, or I don’t know how to search.

The Administration proposes that every person or entity engaged in a trade or business file a Form 1099 that reports amounts paid to corporations if those amounts equal or exceed $600 per year. Information reporting of this sort already exists for wages paid by employers to employees, for pensions paid to retirees, for miscellaneous income amounts paid to individuals, and to a long list of other transactions. Somehow, eighty-six years into the life of the income tax, there is no information reporting for amounts paid by business operators to corporations. Perhaps the assumption had been that corporations report gross income with such high levels of compliance that Forms 1099 aren’t necessary. Experience tells us otherwise.

The AICPA raises three objections to the Administration proposal. Two of the objections are technical matters that can be handled with a bit of attention. The AICPA explains that corporations are on the accrual basis and many business operators are on the cash basis, and thus Forms 1099 would reflect cash paid during the year, which would not necessarily match the income accrued by the corporation during that same year. Ultimately, though, that income needs to show up on the corporation’s tax return, so the IRS should take steps to extend its information return matching program so that it spans taxable years. The AICPA also explains that many corporations use fiscal years but business operators use calendar years in filing information returns. This, too, can be solved by implementing multi-year matching programs.

The AICPA’s principal objection, though, is its assertion that the proposal would be “extremely burdensome for business taxpayers, resulting in compliance burdens far in excess of any appreciable gains in federal tax revenues” and that it would cause “a significant increase in the costs associated with the preparation, mailing and filing of Forms 1099 for many small businesses.” These arguments are not unlike those presented by banks, corporations, and other institutional payors of interest and dividends, who objected to legislation mandating information reporting with respect to those items of income, and who succeeded in bringing about its repeal by use of a scare tactic campaign directed at payees. The banks and corporations claimed that Congress had enacted a “new tax on dividends and interest,” provided pre-written postcards for mailing to payees’ representatives in Congress, and triggered what was, at the time, the largest mass mailing directed at the Congress. The compromise, if one can call it that, was backup withholding, namely, a requirement that income tax be withheld from interest, dividends, and other sources of income not usually subject to withholding if the IRS notified the payor that the IRS had determined backup withholding was necessary on account of the payee’s noncompliance track record.

So here we go again. But perhaps there can be a different outcome. Two thoughts cross my mind.

The first thought is that business operators do incur costs in preparing and filing information returns, though it probably isn’t the “significant” amount the AICPA claims that it is. The second thought is that there is at least one instance in which a government in effect reimburses taxpayers for assisting in the tax collection and compliance process. Pennsylvania, and it probably isn’t the only state doing so, permits those who collect sales taxes to take a “discount” when remitting the sales taxes that have been collected. The discount may or may not cover the cost of doing so, though the availability of software surely makes the process easier than it was in the days when the computations were done with paper and pencil. And thus an idea popped into my head.

Why not provide that business operators who file information returns on account of payments to corporations be permitted to claim a credit equal to, say, one cent for each Form 1099 prepared and filed? If the information returns are filed electronically, the cost of postage disappears. If that’s insufficient, perhaps a credit for the cost of software purchased to generate the Forms 1099, or for the cost of upgrades to existing software.

But as I thought about my idea, I started to think that it could be modified in a way that tested the assertion of the AICPA that these information returns are unnecessary because they will not do much in the way of federal tax revenue increases. In other words, the AICPA’s unspoken premise is that compliance by corporations is sufficiently high that information reporting and matching isn’t worth the effort. So let’s find out. Let’s turn it into a game. Maintain the requirement that the Forms 1099 be filed as proposed by the Administration. Require the IRS to determine, as it necessarily would be determining, if a particular Form 1099 issued to a corporation revealed the existence of income not reported by the corporation. Assume that the AICPA speaks for business operators and that business operators are unanimous in their agreement with the AICPA position. If necessary, permit business operators to opt out of the proposed game if they are willing to file the Forms 1099 without getting a credit. As for those business operators who share the AICPA view, if they are correct with respect to a particular Form 1099, and the income was reported, making the Form 1099 of no practical value, then the business operator filing the Form 1099 gets a credit of say, five or ten cents. If, with respect to a particular Form 1099, it turns out that the business operator filing the Form 1099 wrong and that the Form 1099 reported income not included on the payee corporation’s return, the IRS gets a credit, so to speak, of twenty-five cents. In other words, put your money where your mouth is. These amounts could be doubled or multiplied ten-fold (e.g., $1 and $25, respectively) without diminishing the underlying concept and objective of the proposal. The outcome of the game might even persuade some business operators to reduce or eliminate their dealings with corporations that consistently underreport or fail to report gross income.

And if this works, perhaps it can be extended to other Forms 1099 and even W-2s. Technically, it’s not gambling, but it has that edge of uncertainty about it – business operators probably don’t know what their payees are reporting for tax purposes – that it should appeal to that enjoyment of risk-taking so prevalent in present-day American culture. Payors might find ways to “persuade” payees to report income so that the chances of payors making money rather than losing money from their tax information reporting activities increases. If too many payors are making money, the Congress can adjust the ratio between the payor credit and the IRS credit amounts. Opening up an information reporting credit determination letter from the IRS might become as much fun as scratching off the gray spots on a scratch-and-win lottery card.

Who said tax needs to be boring?

The other day I had a conversation with a student concerning job searches, employment prospects, law practice realities, and the changes that have swept over the legal profession. I returned to my office to find an invitation to a brainstorming virtual conference on the challenges facing legal education. Unfortunately, the conference schedule and my professional commitments overlap, so I won’t be able to participate. But my conversation minutes earlier and the invitation dovetailed nicely, and I decided to share my thoughts with the world. That’s fitting, because those who selected me as a conference invitee did so in part because of this blog.

An interesting thing about evolution is that it doesn’t grab our attention in the same manner as do revolutionary events. With a few notable exceptions, the dying out of a species is noticed after the fact. It’s unlikely that some early homo sapiens sapiens turned to his parents and said, “Goodness, look at me. I’m homo sapiens sapiens and you’re just homo erectus.” The change is gradual, more easily noticed by those who look in from time to time than by those who have almost constant contact with events. Some years ago, my son and I went to visit my parents. As we walked away from the house, my son, who had been away at school and had not seen my father for a few months, said to me, in words very similar to these, “Granddad doesn’t look good at all. He has really deteriorated.” Because I had seen my father much more frequently, I didn’t see the gradual changes. My son had the advantage, if I dare call it that, of looking in from time to time. And so it goes with what is happening with legal education.

To get a handle on evolutionary change, one who is close to the situation must step away and force themselves to look at selected locations on the developing timeline. That is what I try to do. I try to freeze-frame legal education and law practice as it is now, as it was five years ago, ten years ago, twenty years ago. It’s not so much the trends that I seek, but the extrapolation of change from the differences between characteristics associated with two or more of the selected moments in time. What I see causes me to conclude that during the next ten or fifteen years there will be gradual changes that will make the picture in 2024 very, very different from what it is today. It will be so different that our successors in the twenty-second or twenty-third century will look back and see the early twenty-first century as a time of revolutionary change in legal education because from that distance, it will appear that things changed very quickly.

The process of evolutionary change in legal education already has begun. Large law firms are making changes to how they deal with their first-year associates, by instituting what can be called apprenticeship programs. One arrangement can be seen in the details disclosed by Howrey LLP. Another arrangement has been developed by Drinker Biddle and Reath LLP. The differences between the arrangements are small, whereas the similarities are predominant. Generally, firms will reduce first-year associate pay significantly, will limit the number of hours that first-year associates can bill to clients, will cut back the rates at which clients are charged for those associates’ time, and will offer those associates a variety of opportunities to learn what law practice requires of them. Some of those opportunities will consist of judicial externships and following more senior attorneys to observe them in action. But there also will be traditional training in the sense that associates will attend what can be called classes. The firms that are doing this have moved beyond the earlier development, namely, law firms deciding not to hire law school graduates but to restrict entry to lawyers with a few years of experience. In other words, the initial reaction was to let others provide the education that law school graduates need and then to grab the best of them. Other law firms, though, perhaps listening in on my comments, figured out that if everyone sat back and waited for someone else to hire and train law school graduates, there wouldn’t be any trained law school graduates waiting to be grabbed. So firms like Howry and Drinker, and I’m sure there are many others, decided to tackle the problem.

What’s next?

Law firms will discover that to provide the best training without curtailing the production of more senior attorneys, they will need to hire lawyers who have that rare combination of practical experience and pedagogical expertise. For more than a few years, some firms have hired people to come in and teach legal writing, legal research, and similar skills to law school graduates who somehow, much to my consternation, earned J.D. degrees without having polished their ability to do these tasks. So it’s a natural, and evolutionary rather than revolutionary step, to hire a few more people to teach other skills, such as interviewing clients, figuring out where and how to find facts rather than black letter law, counseling clients, professionalism, and even substantive law. These steps will cost the law firms a not insignificant sum of money. Justified by treating the expenditures as an investment, law firms will see growth in what I will call their training staff. Over time, law firms will decide that they cannot permit the cost of training to grow uncontrolled. Someone will suggest that law firms could attain savings through economies of scale, by entering into cooperative arrangements with other firms. Suppose Firm A has someone who is particularly good at training law school graduates in the skill of client interviewing, and Firm B has someone who is just as good at training law school graduates in professionalism. Firm A arranges for its newly hired law school graduates to sit in on the professionalism sessions being taught at Firm B while permitting Firm B’s newly hired law school graduates to sit in on its client interviewing workshops. Either at the outset, or soon thereafter, law firms will create cooperative partnerships or LLPs, or perhaps even non-profit organizations, to handle this training. Advocates of bridge-the-gap programs will be delighted with this development. But it won’t stop there.

As law firms pump money into their “educational cooperatives” while paying law school graduates to attend, they will struggle with the fact that this model generates negative cash flow. There are several ways to deal with this. One is to eliminate the salaries being paid to the first-years associates except to the extent the associates generate the little revenue that they might be generating. Another is to charge the associates for the education that they are receiving. Still another is to invite smaller law firms, firms that cannot afford to set up these sorts of arrangements on their own and that don’t have much of an opportunity to set them up with other small firms, to participate in the “educational cooperatives.” These firms would pay a fee on behalf of their new associates that would permit them to attend the classes, workshops, and other educational activities undertaken by the educational cooperatives. These smaller firms may, in turn, reduce first-year and perhaps even second-year associate pay.

Critics might toss these arrangements aside as nothing more than “glorified apprenticeships.” Apprenticeship in law is not a new thing. In fact, it was the norm until roughly half a century ago. Apprenticeships died out because the time and money challenge to solo practitioners and small firms, which dominated legal practice at the time, pushed legal training into law schools, whose enrollment numbers quickly mushroomed when they and their universities discovered that law schools are profitable operations. Lawyers, for the most part, gladly relinquished the task of training other lawyers because they wanted to practice law, not teach it. The few who found teaching to be fun joined rapidly expanding law faculties or took positions as adjunct faculty often more for the fun of it because the pay for adjuncts was, and continues to be, insubstantial.

The difference this time around is that the bigger law firms have become sufficiently large to permit them to set up these educational cooperatives. As these cooperatives mature, they will lure the best teachers away from law schools, partly because they will offer better pay, and partly because they will provide an environment that is more conducive to emphasis on teaching than is found in many law schools. A few law schools, savvy and prescient, will hasten to form partnerships with these cooperatives, perhaps, in some places, taking them over. These law schools, though, are often disregarded by their peers, in much the same manner as many law faculty sneered at, and continue to put low value on, law faculty who teach clinics. Law firm education cooperatives will also discover that economic and practical factors will compel them to consider, and then adopt, accepting individuals who are not law school graduates. Some of these individuals would receive additional training, destined not to become members of the bar, but to become paralegals, support staff, and other specialists necessary to the operation of a successful law practice. Others will become lawyers. How?

Eventually, the law firm educational cooperatives will find it profitable to take over the training of those individuals that they perceive have potential to be excellent lawyers. It might help to compare this trend to the process by which major league baseball teams ended up with a minor league system, finding it more sensible to “train their own” even though many of their prospects end up with other firms, than to rely solely on players developed by baseball academies. There’s a reason the baseball academy concept didn’t pan out. There are two hurdles that the law firm education cooperatives will face. One is the perception that will lull most existing law schools into lethargic apathy. “They’re not accredited,” will be the usual comment. Yet, if one thinks about it, accreditation isn’t the issue. The issue is whether state Supreme Courts, or the boards under their supervision, will accept “graduates” of these cooperatives as bar examination applicants. Though law schools might think that they have some sort of monopoly, and thus guarantee, on this issue, practicing lawyers outnumber law faculty and law deans, by huge ratios. As the ranks of law school graduates dissatisfied with their law school educational experience, and distressed by the challenges they faced when they started their law practice careers because of deficiencies in their legal education, begin to increase, the political support for changes in bar examination application rules will strengthen. It’s only a matter of time. The other hurdle is the confidence on the part of many law schools, law faculty, and law deans that the only students who would even think about attending a law firm educational cooperative rather than a law school are those who don’t have the qualifications to be admitted to law school. Practical realities, though, will erode that assumption. A huge advantage held by the law firm educational cooperative will be its ability to charge a much lower tuition than do law schools. These cooperatives will not be under pressure to remit cash to a sponsoring university. These cooperatives will not be compelled to hire forty faculty when twenty-five or thirty, or perhaps even twenty, could do the teaching because they’re not caught up in the “scholarly writing” game. In recent years, more and more “young scholars” entering law teaching have demanded a course load of three courses, not for the semester, but for the year. And most of them have received what they have requested.

As these changes continue to follow one after another, or even alongside each other, increasing numbers of students will head for the law firm educational cooperatives. They will be joined by law faculty who aren’t enamored of the transformation that overtook law schools during the past several decades. What will save some of the schools is the fact that many judges will continue to hire graduates of top ten or top twenty law schools to be their clerks, and because those clerks should find jobs, law school applicants with high confidence in their ability to land a clerkship will still head for the Harvards and Yales of the legal education world. Many of the lowest tier schools, with their focus on practical training, will survive, either in tandem with specific law firm educational cooperatives or as absorbed components of those cooperatives. The middle two tiers of law schools, the ones that thought they could out-Yale Yale or out-Harvard Harvard, will fade away. Law firm educational cooperatives might outsource some education to top level law schools, but only if the course meets the needs of law practice. It’s more likely that the cooperatives will try to pry those it considers to be the best teachers away from the law schools. At this point, for reasons of economic security, the teachers will depart.

What will remain? Far fewer law schools, with faculties almost entirely composed of “legal scholars,” with fewer students, and serious financial challenges. Faced with the prospect of raising tuition or increasing teaching loads, the schools will be compelled to choose the latter. If anything, the economics of the law firm educational cooperatives will reinforce tuition reductions. Law faculty accustomed to investing most of its time in writing will find themselves in the classroom for six, seven, perhaps ten courses a year. Those who truly want to spend most of their time writing will depart for think tanks, institutes, and other organizations capable of finding funding to support an activity that the law practice market cannot afford. Others might persuade their universities to transform their law schools into legal institutes, taking on a handful of students as paying fellows, and desperately trying to work out some sort of survival arrangement with the law practice world and its law firm educational cooperatives.

Some law schools might learn the lesson and transform themselves before all of this comes to pass. Surely, as I’ve noted, a few will have done so. But unless Harvard or Yale or Stanford or several of the other “top” law schools does so, almost all the other law schools will “stay the course” (sorry) and wither. Most law schools, and that’s too many law schools, are afraid to buck the trend, in part because of their addiction to the rankings game. Because I think the Harvards and Yales of the legal education world will not see, and cannot see, the implications of what is happening in the law practice world, I doubt that they will evolve, or if they begin to evolve, it will be too late.

Ultimately, universities will seek to enter into arrangements with law firm educational cooperatives. Universities will have almost empty law school buildings to rent out. Some sort of deal will be worked out, though I have not persuaded myself that the cooperatives will become “schools” within the universities. The law firms that operate them will worry that if universities took over their educational cooperatives, the cycle would start over. And having been there and done that, law firms and their cooperatives will be reluctant to return.

And so, one day, ten or fifteen years from now, those who haven’t been paying attention will look around and wonder, “How did this happen? WHEN did this happen?” The answer to the second question is “Not overnight.” The answer to the first will require at least as many paragraphs as are within this blog posting. The details will be somewhat different, but the story will be the same.

Those who object to using the tax system and the IRS administrative mechanisms to accomplish what should be undertaken by other federal agencies in a more direct way count me among their number. Those who object to the federal government transferring money to particular industries, directly or indirectly, count me among their number under certain circumstances but part ways with me under others. Sometimes the so-called free market doesn’t do what it needs to do because it really isn’t free. Sometimes one can consider intervention with federal dollars, whether in the form of tax credits, stimulus payments, or cash-for-clunker reimbursements, to be the price that society pays for having let special interest groups crush the freedom of the marketplace by taking it hostage.

As bad as some might think that the use of tax credits and stimulus payments might be, it could be worse, at least in the eyes of some. Suppose that the federal government, instead of using a cash-for-clunkers arrangement to persuade people to trade in their fuel-inefficient vehicles for more energy-friendly models had instead simply mandated that everyone dispose of fuel-inefficient vehicles and purchase a fuel efficient vehicle. Better yet, suppose that the mandated purchases were limited to the products of domestic automobile makers actually manufactured in the United States. Or suppose that the federal government, instead of persuading people to install storm windows or to purchase energy-efficient appliances simply ordered all homeowners to make those purchases. How loud would the howls of protest be? How many would march on Washington? How many talk show hosts would have on-air fits?

Are my alternative scenarios absurd? Are they the product of some theoretical contemplation? Hardly. Bear with me as I explain one of the many ways I learn things.

Near the end of last year, my pre-eminent friend, a librarian who shares my enthusiasm for the study of language and words, bought me a gift. It was the 2009 Forgotten English 365-Day Tear-Off Calendar. Though a few of the words that I’ve encountered aren’t, strictly speaking, forgotten, at least not from my perspective, and though a few had previously crossed my path, most were new. Perhaps some will enter my lexicon because I like them well enough to try bringing them back into the world’s daily vocabulary. The calendar presents a word, gives its definition and the source of that definition, and then amuses the reader with trivia that may or may not have a direct connection to the word or its definition.

On Monday, I peeled back the Saturday/Sunday page to discover the word flat-cap. It turns out, according to Robert Nares's Glossary of the Works of English Authors (1859), to be exactly what it says, a flat round cap that was the height of fashion during the reign of Henry VIII. If you watch The Tudors, as I do, or some of the other period pieces dealing with that era, you’ve seen them. But the word took on another meaning. As inevitably happens in the world of fashions, the flat cap went of style. But some people, especially Londoners, kept wearing them, and were ridiculed for doing so. The term flat-cap became an insult, directed at those who weren’t keeping up with the latest fashion trends. I almost could take pride in being a flat-cap, except that no one has ever called me a flat-cap.

The trivia presented by the calendar was titled, "Feast Day of St. Maurice." Maurice is a patron of hat makers, something I probably learned in elementary school but forgot. The reader was then educated on a bit of information related to hats. When Elizabeth I was Queen of England, the wool and textile industries fell on hard times. The government intervened. No, there were no income tax credits. No, there were no stimulus payments. Instead, the government passed a law that provided:

Every person above the age of seven Years shall wear upon the Sabbath and Holiday . . . a Cap of Wool knit, thicked and dressed in England, made within this Realm, and only dressed and finished by some of the Trade of Cappers, upon pain to forfeit for every Day not wearing three Shillings four Pence: except Maids, Ladies, and Gentlemen, Noble Personages, and every Lord, Knight and Gentleman of twenty Marks land and their Heirs, and such as have borne Office of Worship in any City, Borough, Town, Hamlet, or Shire; and the Wardens of the Worshipful Companies of London.

Did compliance with this law mean that people spent less money on other things? Did it simply do no more than to divert expenditures for hats and other fashions from imported items to domestically produced headgear? The government did not issue reimbursement checks to hat dealers. It did not provide tax credits. It simply commanded people to spend their money in a particular way. Those who did not comply became contributors to the Treasury.

What’s even more interesting about this approach to government regulation of the marketplace is the existence of exemptions. There’s probably some sense in exempting persons not yet seven years of age, perhaps for practical reasons and probably for reasons connected with the idea that a person not yet seven years of age was not “of age.” But why the exemption for maids? Or for ladies? Or for noble personages? Or for lords, knights, and gentlemen owning land worth twenty or more marks? Why the exemption for clergy? Why the exemption for the London company wardens? Perhaps clergy were required to wear silk headdress rather than woolen caps? Perhaps maids had some similar head covering for which wool was not an appropriate or workable substitute? But even if some rational explanation exists for the exemption of maids and clergy, it appears that the legislation exempted some people for no reason other than money and power. Today’s special interest group lobbyists appear to be following a centuries-old tradition, a tradition that ought to become as obsolete as the term flat-cap. Why? Every time a special interest group obtains an advantage, it puts everyone else at a disadvantage. Unless there is a rational, reasonable, and appropriate justification for shifting an advantage to a small group, putting burdens on the many to benefit the few violates the values of equality and community essential for survival of a democracy.

The Philadelphia Inquirer reported Friday that the governor of Pennsylvania is “cautiously optimistic” that he and the legislature will agree on a budget plan. The governor had threatened to veto the budget plan currently under consideration by the legislature, because he thinks that the numbers being used as revenue projections are unrealistic. If he’s right, the state will face the same budget crisis next year. Nonetheless, negotiations continued. On Saturday, this article reported that an agreement on the budget had been reached. I last wrote about the budget crisis in Some Ramifications of the Pennsylvania Budget Impasse. It’s a topic that just keeps giving and giving.

Several days ago, a spokesman for the Republican Senate Majority Leader claims that "The governor's thirst for higher taxes is unquenchable." One of the tax proposals advanced by the governor is including cigars, chewing tobacco, and snuff within the tobacco tax. Every other state in the nation includes smokeless tobacco in its tobacco tax. Only one other state, Florida, exempts cigars from the tax. If Pennsylvania taxes all tobacco, its revenues would increase by roughly $38 million a year.

In the compromise, legislators agreed to subject cigarillos to the tobacco tax. Cigarillos are cigarette-sized things made with cigar tobacco. It appears that cigars, snuff, pipe tobacco, and chewing tobacco remain exempt. Instead, the state sales tax will be expanded to include tickets to theater, dance, music, and performing arts events, though not tickets to movie or sports events.

Why the refusal by Pennsylvania’s Republican legislators to subject cigars and smokeless tobacco to the tobacco tax? In A Pennsylvania Tax Idea Goes Up in Smoke, the Philadelphia Inquirer, using a clever headline, reports that the press secretary for the House Majority Appropriations Committee suggested, with “tongue-in-cheek reasoning,” that the reason legislators agreed to raise the cigarette tax but leave cigars and smokeless tobacco untaxed was “because the majority of people negotiating the budget are cigar-chomping men.” In the same article, the reporters tell us that polls indicate 70 percent of Pennsylvania residents support the extension of the tax to all tobacco products.

Senate Democrats supported the expansion of the tobacco tax, but Senate Republicans refused to agree. The Senate Majority Leader’s spokesman explained that Republican Senate “leaders dropped the cigar and smokeless-tobacco tax because of its minimal effect on closing the budget deficit.” In a state where every dollar counts in trying to balance the budget, how does $38 million of revenue have a “minimal effect” on the budget? The Philadelphia Inquirer reports that in order to balance the budget, legislators did things like moving $25 million from the state liquor-store system to the general fund. If it’s worth playing with $25 million, why is $38 million off the table?

The governor, who supports taxing cigars, chewing tobacco, and snuff, not only was frustrated with the legislature’s refusal to go along with the idea, but also blamed special interest groups for the inability to get the proposal into the legislation. A spokesman for the Republican House leader explains that Republicans “don’t believe that something should be taxed just for the sake of taxing.” That is an unacceptable explanation. Cigarettes are taxed for a reason. They are taxed because their use imposes costs on society, ranging from the litter of cigarette butt through the impact of second-hand smoke to the increases in health care costs triggered by smoking. Indeed, cigarettes are taxed for several good reasons, and those reasons are no less applicable to cigars and smokeless tobacco. The differences between them are a matter of size, shape, and color. At best, one might argue that tobacco chewers don’t generate second-hand smoke, but they spit the tobacco juice all over the place, which for most people is far worse than cigarette butts covering the ground.

In an editorial, published under the headline Don't hold your breath waiting for smokeless tobacco tax , and the headline Snuffing out a smart tax, the Philadelphia Inquirer joins in criticizing the failure of the legislature to recognize the revenue and health benefits of taxing cigars and smokeless tobacco as it taxes cigarettes. As an aside, now I’ve learned what to do when I have two snazzy titles for a MauledAgain post … publish it twice, once under each title! The editorial points out that in a state where the use of cigars and smokeless tobacco by people aged 16 to 25 is already twice the national average, increasing the cigarette tax most likely will turn more youngsters to using the untaxed tobacco products.

The real reason Pennsylvania Republican legislators refuse to apply the tobacco tax to all tobacco products is their blind allegiance to the “no new taxes,” “no tax increases,” “eliminate taxes” mantras being chanted by a particular segment of society under the baton of the anti-tax crowd’s leaders. Surely someone can come up with an analysis of how applying the tobacco tax to cigars and smokeless tobacco would cut down usage, thus reducing the health care costs incurred by tobacco users. It takes a long-term view of things to understand that the financial benefit to society could be multiples of $38 million, but during the past decade legislators and politicians increasingly have lost the ability to look past the next campaign contribution solicitation cycle, which usually begins the day after the election.

In the meantime, the politicians somehow found a justification for taxing tickets to concerts and museums but not tickets to ball games and movie theaters. So if, indeed, they “don’t believe that something should be taxed just for the sake of taxing,” then what is the reason for taxing tickets to plays and opera performances at theaters but not tickets to movies at theaters? Finding a legitimate distinction between those two types of tickets is as impossible as finding a legitimate distinction between taxing cigarettes and cigarillos but not taxing snuff or chewing tobacco. The distinction that can be found is quite illegitimate, namely, the influence of special interest groups who don't represent the general welfare. Compare, for example, the lobbying budgets of sports teams, who manage to get taxpayer dollars to pay for their stadiums and rinks, with the lobbying budgets of museums and community theaters.

It’s unfortunate that blind allegiance to a disproven and bankrupt sound-bite principle should be an obstacle to good government and the general health and welfare of the state’s citizens. Instead, concert-goers and patrons of fine arts, music, and museums will bear a higher tax burden so that cigar smokers and smokeless tobacco users can escape any increase in the taxes they pay on their habit. What percentage of Pennsylvania's citizens attend concerts and theater events, and what percentage use cigars, snuff, and chewing tobacco? Think about it. It might be challenging for some politicians to put the interests of the populace above their desire for re-election but a democratic republic cannot be sustained when the acquisition of power becomes more important than the exercise of the stewardship obligations that accompany that power.

Thanks to a tip from Paul Caron’s TaxProf Blog, I examined the data in Michael Niewswiadomy’s LSAT Scores of Economics Majors: The 2008-2009 Class Update, particularly the list of LSAT scores arrayed by undergraduate majors. Paul’s post generated a good bit of discussion among tax law professors, and some of what I share here reflects my reactions to what others have said.

Several technical questions can be noted and then set aside lest they cut off discussion too soon. I would like to have seen the data for all of the undergraduate majors, not just those with 450 or more students in them. Why? I would like to see the, no pun intended, performance of music majors on the LSAT, because music majors often are held up as examples of those who are predicted not to do well in law school and yet, at least anecdotally, they have done well in tax. Someone expressed a dislike for the grouping of math and physics majors, as well as some other groupings, but apparently the author did this in order to create clusters with at least 450 scores. Why not stick with ungrouped data and provide all of the scores no matter how few the number of students taking a particular major?

One interesting question is whether there are any features or characteristics of particular majors that would explain the manner in which the array takes shape. For example, at first glance one might think that undergraduate majors requiring attention to math or numbers correlate with higher scores, but philosophy, theology, and foreign languages make the top ten, whereas business majors, finance, and accounting aren’t as high on the list as I would have expected. Does the list correlate with the extent to which students are required to write or to deal with words, both key attributes of legal analysis? I don’t think so. Scientists have a reputation of not being good writers, so the presence of physics, math, engineering, and chemistry majors in the top ten push me away from such a correlation as does the existence of journalism and marketing in the bottom 1/3 of the list. Is the correlating factor the need for students in a particular major to be adept with structures, organization, problem-solving that requires comparison of alternatives, and dealing with complex interrelationships among concepts? Perhaps. Those attributes seem to be more prevalent among the majors in the top half of the list.

Another interesting question, that did not occur to me until I looked at this a second time just two days ago, is whether there is some correlation between the self-selection of test-takers from undergraduate majors and the job prospects or workplace experience of people who majored in a particular area. In other words, is it possible that those majoring in certain subjects tend to find it more difficult to obtain employment, to succeed in employment, or to be happy or fulfilled in employment, and thus more likely to turn to law school? If so, would the pool of LSAT takers from those majors tend to be a bit less intellectually adept than those in other areas? It’s possible, but I have my doubts. The undergraduate majors in the top ten, with perhaps three noticeable exceptions, are not areas in which employment prospects are bleak, at least in comparison with overall college graduate employment experience.

One piece of information that waves a huge red flag in my face is the relatively poor showing by students whose undergraduate major is prelaw. I haven’t looked closely at what courses prelaw majors have been taking, but I wonder how many of those courses involve skills that matter most in LSAT success, law school achievement, and legal career accomplishments. It’s also curious that those majoring in criminal justice close out the list, though it is possible that it would not be last on the list if undergraduate majors with fewer than 451 test-takers in them were included in the data.

But the biggest question for me is the chicken and egg question. Do physics and math majors do so well on the LSAT because those majors require them to develop skills most useful for the LSAT and law school? Or do those majors do so well because they’re intellectually more adept to begin with, compared to students in other majors? In other words, should college students interested in being lawyers turn themselves into physics, math, engineering, or philosophy majors? As one of my colleagues at another school put it, “That would be a little like telling a student with visual problems that he should take flying lessons, since pilots generally have good eyesight.”

Paraphrasing from my initial reaction to the data, I would suggest that students who want to be lawyers look for courses, and secondarily, majors, that require them to have and develop the ability to apply logic, figure out structure, understand organization, engage in comparative analysis, and produce comprehensible and high-quality writing. Students should look for courses that encourage and reward academic discipline, that are characterized by frequent assignments throughout the semester, and that encourage the student to think and figure things out for himself or herself. In other words, avoid the courses steeped in lectures and memory-regurgitation examinations. That’s not what the LSAT tests, that’s not what makes for success in law school, and that’s not what makes for a worthwhile legal career.

Thanks to Paul Caron’s TaxProf Blog posting, I found myself reading the 2009 Payscale College Salary Report, particularly its “Best Underground College Degrees by Salary.” For the most part, it didn’t surprise me, and I doubt it surprised those who pay attention to this sort of information, but I wonder if it would be an eye-opener for most people. I write “for the most part” because I wonder who’s hiring the philosophy majors.

I wonder how many high school and college students examine reports such as this one. It’s not difficult to imagine someone arguing that the pursuit of an education and a career should be done free of financial or monetary influence, and thus recommending that students not consider what awaits them upon graduation. I wonder where the world would be if everyone simply invested his or her life in doing what he or she wanted to do, money be damned. I’m certain that a significant portion of the population would be doing something other than what they’re now doing, even if what they’re now doing is looking for something to do for which they can be paid.

I also wonder what this report says about our society and culture. Is it a true measure of the value we put on particular activities? Are engineers that much more valuable than social workers? Are accountants that much more valuable than theologians? Or do these salaries reflect the other side of the supply-demand curve? Do engineers receive relatively higher pay because the demand exceeds the supply? It’s no secret that disproportionately fewer college students major in engineering, most likely because the course work is far more demanding from their perspective. Or do engineers receive relatively higher pay because their employers can bill them out to clients at relatively higher rates? And if that is the case, is it simply another aspect of demand exceeding supply?

And I also wonder what the chart would show if careers open only to those with graduate degrees, such as medicine, law, dentistry, and the like, were included. My guess is that those salaries would be on the high end, but unlike the guesses of some, I don’t think that they would top the chart. There’s a reason that a careful calculation demonstrates that from a financial perspective, an engineering graduate taking a job paying $65,000 a year at graduation and $109,000 fifteen years down the road may be better off than an engineering graduate incurring another $120,000 in education debt, enrolling in law school, and giving up three years of income.

I also wonder what the chart would show if careers that don’t require college or graduate degrees were included. Perhaps many would think that the high salaries earned by high school graduates who are drafted by the NBA or major league baseball would put professional sports at the top of the chart. But most professional athletes have college degrees, though I don’t think the Payscale College Salary Report includes their salary data because they’re not working in the field in which they earned their degrees. Most would guess, myself included, that the typical careers pursued by those without college degrees would fall on the low end of the chart. Would that be another case of supply and demand? A matter of societal valuation? Some combination?

I also wonder whether this report reflects a truly “free” market determination of salaries. A good argument can be made that it does. People earn degrees, seek jobs, receive offers, compare opportunities, and make choices. On the other hand, some occupations are under more pressure to keep salaries low than are others. Do nurses earn less than they otherwise would because of financial constraints compelling health care institutions to reduce costs in reaction to reductions in payouts from health insurance companies? Do teachers earn less than they would in a marketplace that was unencumbered by taxpayer pressure on school boards to minimize teacher salaries?

All in all, though, considering the importance of school teachers to the formation of the next generation, it is disturbing that America invests more in professional sports and entertainment than in elementary education. As much as I enjoy most professional sports, and though I do watch movies, usually after they show up on cable, I do wonder whether the “free” market is serving the nation well when such huge distortions exist in the pay scales. But I suppose societal freedom includes the freedom of a society to make unwise choices?

Though I am an advocate of levying taxes sufficient to pay for what the people want to have, as discussed, for example in Another Reason Why There Are, and Need to Be, Taxes and User Fees, and disagree with those who think that cutting taxes when deficits exist is sound economic policy, I also support the proposition that taxes should be administered fairly. I would be among those objecting if it were discovered that a particular store or chain of stores was not charging sales tax to certain customers while subjecting others to the tax, or charging a lower rate to select customers. As absurd as that example may appear, something quite like it continues to take place in Philadelphia with respect to the real property tax.

Friday’s Philadelphia Inquirer brought a story whose headline, Business As Usual at the BRT says much to those familiar with the city’s Board of Revision of Taxes and perhaps little, if anything, to those mercifully untouched by its activities. Sundays' paper brought yet another story, New BRT Numbers Don't Add Up, Review Shows. These articles are yet two more in a continuing series by Philadelphia Inquirer investigative reporters, earlier chapters of which I noted in Taxes, Sausage, and Politics.

Several years ago, I dedicated at least five posts, some lengthy, to the systemic problems of the Philadelphia real property tax, or, more specifically, the systemic problems in the operation of the bureaucracy charged with administering the tax. In An Unconstitutional Tax Assessment System, Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, and How to Fix a Broken Tax System: Speed It Up? , I explained how the pervasive flaw in the administration of the tax was the irregularity, inconsistency, inequity, and inefficiency of the valuation process that generates the amount on which the real property tax is computed. In Not the Sort of Tax Loss Taxpayers Prefer, I explored the particular problems surrounding the Board’s low assessment on property owned by a Philadelphia-based state legislator now serving prison time and the disclosure by the Board that it had lost files associated with the property and its special valuation.

The most recent manifestation of BRT problems made its appearance when assessment notices were sent out recently. According to the Friday Philadelphia Inquirer article, the assessments on ten similar house on a small street in South Philadelphia went up. That’s not the issue. The increases ranged from 25 percent to 236 percent. And I’m not certain that there is an issue in that discrepancy. Here’s why. For years, properties in Philadelphia have been assessed at widely varying values, some near market value, some far below market value, and some in-between. The law requires that the properties be assessed at market value. So if the houses on one block are all brought up to market value, some will see huge percentage increases in the assessment and some will see much lower increases. Theoretically, it’s possible that some would see no change. I doubt any would see a decrease if things were done properly, even though 795 of the 14,095 properties reassessed city-wide were given assessment reductions.

The problem with this recent set of notices is that the assessments placed on the homes vary widely. The homes, according to the article, are pretty much the same size, pretty much look the same, and sit on same sized lots. A spokesperson for the BRT claims that the differences in assessments reflect rehabilitation work done to some of the homes. People living on the street point out that the properties with the high assessments don’t match up with properties that have been fixed up, making one wonder if anyone from the BRT ever looked inside the houses. Worse, the assessments vary so much that some houses are valued at three times adjoining houses, an outcome that the market does not support. Even a totally rehabilitated house is not worth three times its neighbor, because none of the houses are dilapidated hovels. And surely rehabilitations on the order of refurbished kitchens and bathrooms don’t cause a house value to triple.

The Sunday article focused on commercial properties, where the discrepancies make the inconsistencies in residential property valuations look petty. Not only are there instances where properties are valued at multiple times their actual value, there also are instances of properties assessed at small fractions of their value. When confronted, the BRT tends to reply that these problems are caused by data entry errors. But the problem involves more than typos getting past supervisor's reviews. The BRT is working with data so old that it assesses properties as though they held the structures that existed years ago. In one instance, a small lot was measured in multiple acres. The outcome causes the per-square-foot assessed value of parking lots in run-down neighborhoods to exceed the per-square-foot assessed value of downtown parking lots. One business property in an economically distressed neighborhood was assessed at an amount that caused its per-square-foot assessed value to exceed those applicable in the city's arguably most elite residential neighborhood.

Though it’s easy to understand why these problemexist, it’s difficult to justify it. One can accept variations from neighborhood to neighborhood as the BRT works its way methodically through the city bringing assessments up to market value. A transition from the current system to what it ought to be means that there will be a period during which some of the city is under the current system and some is under the revised approach. But to reassess properties in a manner that perpetuates the existing flawed system cannot be justified. BRT employees ought not be putting their efforts into perpetuation of a system that should be moved to the trash heap as quickly as possible. It’s not rocket science. It’s not that big of an intellectual challenge to look at the assessments for a particular block or neighborhood, compare the assessments to the physical description and pictures of the properties, and determine if the assessments are out of line. If that’s being done, there ought not be 300 percent assessment valuation variations for houses on a block of what are very similar structures. Nor should it be a daunting task to acquire correct information and enter it into databases without a flood of errors. One must wonder what sort of systems are in place to minimize and eliminate clerical errors. One wonders why the BRT doesn't know what several investigative reporters seem capable of figuring out fairly easily.

When tax administrators do not comply with the law, when they drag their feet bringing tax administration systems into compliance with the law, when they engage in practices that cannot be justified despite the litany of excuses, when they cause people to be receive inequitable tax bills, when they cannot get correct information, when they cannot operate an agency in a manner that prevents error proliferation, and when they make taxation a target of scorn and derision, they are failing in their obligation to serve the public. It’s no wonder that people jump on the “eliminate taxes” bandwagon. Some might think that the chaos of a tax-free world is a better place than the injustice of a flawed-taxation world. Some might understand that the problem isn’t the existence of a tax but the breakdown in the system that causes fiduciary duties to fall into the gutter. But many will translate the practices and outcomes described in the Philadelphia Inquirer stories, in my MauledAgain posts, and in similar reports as “proof” of the need to eliminate taxes. What the BRT has been doing, and continues to do, makes it increasingly difficult to persuade people not only that taxation is essential but that taxation can be fair.

According to the Internal Revenue Code:

…. the term “taxable income” means gross income minus the deductions allowed by this chapter.

See section 63(a) (emphasis added).

According to the Bureau of Internal Revenue, the predecessor of the IRS:

The word “allowable” designates the amount permitted or granted by the statutes, as distinguished from the word “allowed” which refers to the deduction actually permitted or granted by the Bureau.

See I.T. 2944, XIV-2 C.B. 126 (1935).

According to the Tax Court, in Lenz v. Comr.76 101 T.C. 260 (1993):

Throughout the Code, a distinction is made between the terms “allowable deduction” and “allowed deduction,” which distinction is not insignificant. Day v. Heckler, 735 F.2d 779, 784 (4th Cir. 1984). Unfortunately, as with many terms of art in the area of tax law, these terms are often interchanged with one another, causing confusion. We must rely on the words of the statute as generally understood, and to do otherwise would be to redraft the statute. United States v. Locke, 471 U.S. 84, 95-96 (1985). “Allowed” and “allowable” have fixed meanings in the tax arena, and we interpret statutes using these terms in light of their understood meanings except where to do so would create absurd results. See United States v. American Trucking Associations, Inc., 310 U.S. 534, 542-543 (1940).

“Allowable deduction” generally refers to a deduction which qualifies under a specific Code provision whereas “allowed deduction,” on the other hand, refers to a deduction granted by the Internal Revenue Service which is actually taken on a
return and will result in a reduction of the taxpayer's income tax. See Reinhardt v. Commissioner, 85 T.C. 511, 515-516 n.6 (1985); see also sec. 1.1016-3(a)(1)(i)(a), Income Tax Regs. Respondent in fact defined the terms “allowable” and “allowed” in I.T. 2944, XIV-2 C.B. 126 (1935), as follows:

The word “allowable” designates the amount permitted or granted by the statutes, as distinguished from the word “allowed” which refers to the deduction actually permitted or granted by the Bureau.

Thus, one might have an item of expense which is allowable as a deduction; however, the deduction is not allowed. In Day v. Heckler, supra at 784, for example, it was noted that certain land clearing expenses were an “allowable deduction” under the Code; however, such deduction would not be “allowed” unless the taxpayer made an election to take such deduction.

Id. at 265.

In Central Illinois Public Service Co. v. U.S., 435 U.S. 21 (1978), the Supreme Court held that lunch reimbursements paid by the taxpayer to its employees were not “wages” subject to withholding. In its opinion, the Court stated: “The income tax is imposed on taxable income. 26 U.S.C. § 1. Generally, this is gross income minus allowable deductions. 26 U.S.C. § 63(a).” (emphasis added). Several years ago, in “No Thanks, Uncle Sam, You Can Keep Your Tax Break,” 31 Seton Hall Leg. J. 81 (2006), which can be found here, I analyzed the issue of whether deductions are mandatory, and in doing so, focused on the meanings of the words “allowed” and “allowable.” I did not address the Supreme Court’s language in Central Illinois because it did not turn up in my research. It did not turn up because the issue in the case was a withholding question and not an income tax liability question. As the court itself noted, in rejecting the IRS attempt to equate wages for purposes of section 3401 as coterminous with compensation for purposes of section 61, the withholding rules are in subtitle C and the income tax is in subtitle A of the Internal Revenue Code. The court stated, “The income tax issue is not before us in this case.” So why did the court toss in a gratuitous, and erroneous, paraphrasing of the income tax law? There was no need to explain how taxable income is computed, because the computation of taxable income has nothing to do with whether lunch reimbursements are wages subject to withholding. In other words, the issue in Central Illinois Public Service had nothing to do with the meaning of the words “allowed” and “allowable,” nor does the Court’s language mean that the two words are the same.

Yet clearly the Supreme Court of the United States has written that section 63 defines taxable income as “gross income minus allowable deductions,” whereas the statute clearly states that taxable income is “gross income minus the deductions allowed by this chapter.” Why was the word changed? My guess is that the person writing the opinion, either Justice Blackmun, one of his clerks, or some combination of thereof, was careless, or erroneously thought that "allowed" and "allowable" are interchangeable words with identical meanings. One wonders if the sentences in question were written with the Internal Revenue Code open in front of the writer, or if the sentences were extracted from someone’s class notes, notes reflecting inadequate listening during class or failure to assimilate properly after class by looking again at the Code and cross-checking the language in the class notes or outline being prepared by the student. Perhaps the clerk in question was referring to the outline used in the course, prepared by a predecessor in an earlier instance of the class, without paying due attention to the fact that there are errors in those old outlines floating around law schools. Or perhaps, and it is painful to write this, it could have been a matter of the clerk having been a student in a course taught by someone who was not careful with words, who conflated “allowed” and “allowable,” or who left the students on their own to learn the technical language issues while class time was devoted to tax theory, tax policy, and discussions of what the tax law could or should be rather than what it is.

Could the Supreme Court have intended that the word change convey a decision that “allowed” and “allowable” are the same word? Hardly. The issue of whether “allowed” means “allowable” was not in front of the Court. Nor was the computation of taxable income for subtitle A income tax purposes before the Court. The two sentences in question are irrelevant to the decision. Their removal would not only leave the holding and necessary reasoning intact, but also avoid the confusion that their existence has created for those who, quite reasonably though erroneously, consider the two sentences to be authoritative declarations of black letter law.

To be fair, the sentence in question is qualified by the word “Generally.” That word does not appear in the statute. The statute does begin with the phrase “Except as provided in subsection (b),” which is a reference to the different definition of taxable income for individuals who do not itemize deductions. The word “generally” implies that there are exceptions. Was the drafter of the opinion using the word “Generally” as a substitute for the statutory exception language, or as a hedge against the use of the word “allowable” when the statute provides “allowed,” or both? However that question is answered, it does not justify the use of the word “allowable” when the statute uses the word “allowed.”

It’s no secret that tax law is not a favorite topic at the Supreme Court. See Erik M. Jensen, “Of Crud and Dogs: An Updated Collection of Quotations in Support of the Proposition That the Supreme Court Does Not Devote the Greatest Care and Attention to Our Exciting Area of the Law; or Something the Tax Notes Editors Might Use to Fill Up a Little Space in That Odd Week When Calvin Johnson Has Nothing to Print,” 58 Tax Notes 1257 (1993). Tax, of course, is not the only area of law where precision with words is critical to the analysis. For many, working closely with words is nowhere near the fun as working with theories, policies, and broad concepts. Not only do most people who are not lawyers have difficulty understanding why such a big deal is made of the difference between two very similar words, even some lawyers and law faculty struggle to find significance in the detail. Even in the tax world I discover far too many tax practitioners and tax students who conflate “distributive share” with “distribution” even though they represent two very different things.

Perhaps the answer to how this unfortunate substitution of one word for another came about can be found in one of the quotations in Erik Jensen’s article. Stuart Taylor, Jr., in “Reading the Tea Leaves of a New Term,” The New York Times, Dec. 22, 1986, at B14, quoted Blackmun as saying, “If one’s in the doghouse with the Chief [Justice Burger], he gets the crud. He gets the tax cases. . . .” I wonder if that meant that the justice’s clerk got the tax cases. I wonder if the clerk also considered tax cases to be crud. And I wonder how much focus and attention is given to crud when far more exciting issues are being discussed in the hallways and in other offices.

Earlier this year, in Meals, Candy, Taxes, HoHos, and Lent, I tried to help readers digest a case in which the Supreme Court of Vermont faced the issue of whether popcorn and nachos served by a movie theater are taxable meals. The court had to deal with a regulation, adopted in 1969, provides that "popcorn, potato chips . . . and other similar products" are "[e]xamples of items considered to be candy and confectionary not subject to the [meals-and-rooms] tax." Ultimately, the court had to ask, "What is candy?"

Four years ago, In Halloween and Tax: Scared Yet? , I reported on the decision by New Jersey to remove the sales tax from candy bars made with flour, and shared information, new to me at the time, that licorice, KitKats, and Nestle's Crunch is made with flour. The change brought New Jersey into line with what is done in other states.

Once again, the mind-boggling question of "what is candy?" has reared its syrupy head. Thanks to an alert from Paul Caron's TaxProf Blog, I've learned that Illinois has amended its sales tax law so that candy no longer is taxed at the lower rate that applies to food but at the same higher rate that applies to other taxable items generally. Thus, the question that presented itself to the Supreme Court of Vermont, "What is candy?," has presented itself in Illinois. According to the wonderfully headlined article, The Twix tax test brings twisted results, the Illinois law provides that "Items that contain flour or require refrigeration are not considered candy." Employees of the Chicago Sun Times went shopping to learn what would happen when they purchased Twix. It turns out that four stores treated Twix as candy for sales tax purposes, four treated Twix as food subject to the lower rate, and one store had not yet changed its cash register system but one of its employees was "surprised and confused" to discover Twix is not candy for sales tax purposes. Tax law does that to people. Surprised and confused is a familiar reaction among people encountering tax law.

In a blog editorial also carrying a fun headline, Sugar tax for good and IL, the writer explains that the impact in Chicago of the sales tax change for candy is an increase from 2.25 percent to 10.25 percent. Writing from the perspective of a Michigan resident, the writer expresses agreement with the concept of "tak[ing] soft drinks and candy out of the nontaxable category," noting that "[p]ediactricians have lobbied for a sugar tax." Pediatricians are not alone in their lobbying, but a sugar tax and a candy tax surely are different things, for Twix escapes the candy tax but would not escape the sugar tax. Technically, bananas, carrots, peaches, and many tomato sauces would not escape a sugar tax levied on all items that contain sugar. So as support for a sugar tax grows, expect to hear and read more about the meaning of sugar. There may be some sweet topics ahead for MauledAgain.

There are two things guaranteed in New Jersey and some other states. No, I’m not referring to death and taxes. I’m referring to the certainty that everyone complains about the condition of the roads, and to the certainty that almost everyone opposes efforts to raise taxes or user fees to fund repairs to the roads. Trying to persuade people that the bad roads will not get better, and probably will get worse, if taxes or fees to fund the required repairs aren’t generated is akin to trying to teach algebra to the squirrels in my front yard. Hello? How will the roads be repaired if there are no funds provided for doing so? The often-heard answer, “We’re already paying taxes so use that money” flies in the face of the reality that $10 in taxes will not cover a $5 road repair fee, a $7 fire department cost, a $12 police department expense, and a $30 public education outlay. In other words, the cost of what the public wants exceeds the amount the public is willing to pay. We get to do that when we’re children, demanding food, shelter, and clothing of our parents without giving back in equal consideration, even with the performance of chores and even in the absence of allowances. But at some point, we must evolve into beings who understand that we ought to pay for what we want or else learn to live without having what we want. And that is what has happened in many places, including New Jersey.

A compilation issued by Transportation for America, using Federal Highway Administration information, lists New Jersey as the state winning a competition no jurisdiction wants to win. In New Jersey, 28.2 percent of the roads are in “poor condition.” Pennsylvania fares somewhat better, with “only” 11.3 percent of its roads getting that unenviable classification. A spokesperson for the New Jersey Department of Revenue was quoted in this Philadelphia Inquirer story to the effect that there has been a 50% increase in the amount spent to repair bridges, and that more money has been spend in 2008 and 2009 on resurfacing than during the 2003 through 2007 period. Some of the money, however, comes from federal stimulus grants, the price for which ultimately will be higher taxes in the future, on someone. And once the stimulus funds are exhausted, the roads will resume falling apart faster than present funding permits repair. Part of the problem is that New Jersey has the fourth-lowest state gasoline tax in the country. Every attempt to raise gasoline and liquid fuels taxes to reflect the actual costs generated by the use of those fuels is met with organized resistance by those who think that roads will somehow pay for themselves. Toss in the idea of turning highways into toll roads and the resistance gets louder and stiffer. Next year, we are told, New Jersey’s Transportation Trust Fund is slated to use all of its receipts to pay interest on money borrowed in the past to pay for road repairs that should have been funded with fuels taxes and user fees.

A spokesperson for the American Automobile Association points out that unless the highway funding issue is resolved, the problem will get worse. It won’t be long before people will speak nostalgically about the days when “only 30 percent of the roads were in bad condition.” There’s an irony in the fact that this point is being made by the AAA. In a survey of its New Jersey members, almost two-thirds opposed increases in the gasoline tax. I suppose the notion of getting someone else to pay for what one wants is a practice that just won’t die. It’s an idea not distantly related from the attitude that caused and causes some people to think that they can get other people to do their work for them, for free.

If the anti-tax crowd and the tax-everyone-except-me prima donnas continue to be successful in marketing their foolish messages, it won’t be long before highways won’t be the only thing with a high percentage of failure or near-failure. Fire and police services in Philadelphia are on the verge of attaining that embarrassing condition, as I’ve noted in previous posts such as Tax Doomsday Looming for Philadelphia. How long until high rates of failure and near-failure afflict military defense, public education, building and aircraft safety inspections, and every other service on which citizens, including the eliminate-taxes crowd, because of insufficient funding? How long until Americans begin to figure out that if they don’t like driving on roads in bad shape they need to stop opposing the very revenues that are required to put those roads into condition acceptable to them? If it takes too long, the next doomsday won’t be limited to taxation nor to the city of Philadelphia.

According to a recent CNN report, one of the individuals who supplied a kidney to the Brooklyn resident charged with organ trafficking has come forward to explain that he was paid for one of his kidneys. The CNN investigators who are looking into the scope of the black market kidney business quote Nick Rosen as responding, “Let’s say I donated a kidney and received compensation.” Rosen admitted that he was paid $20,000, although he concealed that information from the medical personnel at the hospital where the kidney was transplanted to the recipient. Medical professionals estimate that as many as 2,000 kidney transplants each year may be black market transactions. That’s $40,000,000 in “sales,” if Rosen’s compensation is the appropriate benchmark. Reports exist that some kidney providers have been paid $25,000.

Among my first thoughts as I read the report were the tax questions. Does Rosen have gross income? Surely. So we are told not only by the Internal Revenue Code but by United States v. Garber, 607 F.2d 92 (5th Cir. 1979) and Green v. Commissioner, 754 T.C. 1229 (1980). Did Rosen report the gross income? I have no idea. The kidney was extracted in New York, so the transaction is subject to federal income tax unless there is some tax treaty provision to the contrary, which I very much doubt. Can Rosen reduce the $20,000 by his adjusted basis in the kidney? If the IRS position that the sale of blood is a sale of services, a position it takes with respect to the charitable contribution deduction, stands up and is followed by analogy, then the answer is no. And even if the transaction is treated as a sale, Rosen’s adjusted basis in the kidney is zero, a conclusion consistent with the reasoning in cases such as Garber and Green. Is the $20,000 capital gain? As explained by court that decided Green, the answer is no, because the kidney either is property held for sale or her activity is a service. Is the income subject to self-employment tax? That’s a tough one. Can the $20,000 be considered wages? Was Rosen compensated for performing services? The IRS position that giving blood is a service, precluding its qualification as property eligible for a charitable contribution deduction, suggests that the self-employment tax would apply. Is or was Rosen in the business of selling kidneys? Unlike Garber and Green, who sold regenerative blood components, Rosen only had one kidney to sell. But a person can be in a trade or business even if he or she is selling only one item. Rosen, of course, by admitting he “received compensation,” makes it easier for the IRS to argue that the $20,000 constitutes self-employment income. The court in Green noted that the taxpayer “performed no substantial service.” Yet the product analogies used by the court, “hen’s eggs, bee’s honey, cow’s milk, or sheep’s wool” and “human hair,” and the processing analogy, “sale of a tangible raw material to be processed and eventually resold by the lab,” can be distinguished because those are all regenerative items whereas the kidney is not, and those items are raw material whereas the kidney is not raw material but is delivered to the recipient intact.

Not surprisingly, there are more tax questions. Assuming Rosen was not reimbursed for his expenses, over and above the $20,000, is he permitted to deduct the amounts he paid in connection with the kidney transfer? Though we can assume that the medical expenses of the removal operation were charged to the kidney recipient or that person’s medical insurance, what about, for example, the cost of flying to New York? The reasoning in the Green case tells us that the answer is yes.

Rosen’s situation is a bit easier to analyze than those in which kidneys are swapped, which I discussed in The Taxation of Kidney Swaps. And there’s no chance that the transaction could be “marked down” to an artificial, and tax-irrelevant one-dollar fee, a suggestion I analyzed in Taxation of Kidney Swaps: Dispelling the "Ivory Tower" Myth.

Two other points need to be made. Rosen also said, “Let’s say I donated a kidney,” which might cause some to think Rosen made a gift and thus cannot be taxed. The point is that Rosen transferred a kidney. He did not make a gift because he received $20,000. Students get annoyed when I interrupt them as they begin a question in these terms, “Suppose an employer gives an employee $10,000 to work overtime.” I object to the use of “gives” as the verb in the sentence and tell the students that if they want to avoid characterizing the transaction, they need to use the neutral term “transfers” and avoid the words “gives,” “pays,” and “compensates.” Does the fact that the transaction was illegal make a difference? Not at all. Gross income from illegal transactions, and the list is very long, is gross income. That’s a long-established principle of federal income tax law.

The first class in this semester’s basic tax course met on Friday. On Sunday, those paying attention – and I was not one – could have, if they so chose, marked the twentieth anniversary of the conviction of Leona Helmsley for tax evasion. There are lessons to be learned from her case, but a passing reference to her in class surely would mean nothing to most, if not all, of the students enrolled therein. When Leona Helmsley was indicted, these students were toddlers, or perhaps a bit older, but not yet in kindergarten. Even if they overheard their parents talking about Helmsley, which presupposes that their parents were talking about her, it would have meant nothing.

Helmsley and her tax woes made headlines for several reasons, but the best lesson to be learned from her and her husband’s behavior isn’t the one that found itself in the brightest spotlight. The tax evasion efforts of the Helmsleys may have gone undetected were it not for the disclosures made by some contractors that the Helmsleys had tried to short-change. Despite all sorts of audits and computer evaluations of tax returns, the IRS continues to identify a significant number of tax evaders, who often are well-known and thus good material for the IRS to use as warning examples, when a displeased spouse, disgruntled employee, disaffected neighbor, or displeased business associate opens up to the IRS. In the Helmsleys’ case, they refused to pay the contractors who had remodeled one of their vacation homes. The contractors sued, and the litigation proceedings revealed that the expenses were billed not as personal items, which are nondeductible, but as business expenses, which they clearly were not. It didn’t take long for Rudy Giuliani, then U.S. Attorney, to indict the Helmsleys and some others involved in the scheme. A wrinkle to this lesson is that greed sometimes backfires.

Another lesson is the answer to the question, what do people with lots of money do with it, especially if they’re not paying taxes, whether on account of tax evasion or special low tax rates on capital gains and high incomes. In the Helmsleys’ case, it was used for things such as a $45,000 silver clock and a $210,000 mahogany card table. I suppose the argument is that by purchasing these items the Helmsleys created work for clock makers and table builders, but would not society have been better served if the money somehow increased the number of people employed as primary care physicians?

The answer, perhaps, lies in the quotation attributed to Leona Helmsley by a former housekeeper, a quotation that Helmsley denied having spoken. According to the housekeeper, when the housekeeper said to Helmsley, “You must pay a lot of taxes,” Helmsley replied, “We don’t pay taxes. Only the little people pay taxes.” Although Helmsley’s assertion is not literally true, for most, though not all, wealthy individuals pay taxes, it surely describes the goals of many people, including those who dream that someday they will join the ranks of the rich.

One last lesson was the one learned by the housekeeper, and then learned by the many Americans who followed news reports of the trial. The assumption that the wealthy pay proportionately more taxes isn’t necessarily true across the board.

Fortunately, not all wealthy people share the greed and obnoxious personality of Leona Helmsley. Her less than admirable outlook on tax policy was just a small facet of the way she mistreated employees and others with threats, tirades, unjustified dismissals, and other behavior that earned her the nickname, “Queen of Mean.”

Leona Helmsley went to jail. The prison doors closed behind her on April 15, 1990. She served 18 months, and after release, lived alone, had to give up control of her real estate holdings, became estranged from almost everyone, including family, lost several lawsuits, and then began handing out money to charities. When she died, her estate was immersed into litigation, including disputes over the $12 million she wanted to leave in trust for care of her dog, a pet aptly named Trouble.

Those who want to get into the details from a legal perspective can read United States v. Helmsley, 941 F.2d 71 (2d Cir. 1991), cert. denied, 502 U.S. 1091 (1992). There’s a nice writeup at Wikipedia.

In the meantime, if I choose to turn my students’ attention to the Helmsley saga, I’ll need to do so with something more than a passing reference. Perhaps when we get to section 162 I can ask the class whether the cost of a $210,000 mahogany card table is deductible. I think it’s safe to assume that a reference to a card table is not merely historical. Despite the proliferation of video games, card tables are still in use, though I’m going to guess that, like me, none of my students have ever seen one that cost $210,000.